What Is Generation-Skipping Tax? Triggers, Rates, and Exemptions

The generation-skipping transfer tax is a federal tax on wealth that moves two or more generations down at once, such as money or property a grandparent passes directly to a grandchild. Congress created it so families couldn’t sidestep estate tax at each generational level by skipping a generation. For 2026, each person can transfer up to $15 million to younger generations without owing this tax, and anything above that threshold faces a flat 40 percent rate.¹

Who the Tax Applies To

The tax turns on a single question: is the recipient a “skip person”? A skip person is someone at least two generations below the transferor. For family, that usually means grandchildren, great-grandchildren, and further descendants. Transfers to your own children don’t trigger the tax because a child is only one generation down.²

For unrelated recipients, the IRS uses age rather than family lines. Someone born more than 37½ years after the transferor is a skip person.²

Trusts can be skip persons too. If everyone with an interest in a trust is a skip person, the trust itself is treated as one. The same result follows when no one currently holds an interest but every possible future distribution would go to skip persons.³

When a Grandchild’s Parent Has Died

An important exception: if a grandchild’s parent (your child) is already dead when you make the transfer, that grandchild moves up one generation for tax purposes. The transfer stops being a generation-skipping event because the intermediate generation is gone from the family. A parent who dies within 90 days of the transfer is treated as having predeceased the transferor. The rule reaches any descendant of the transferor’s parent, including adopted family members.⁴

The Three Kinds of Transfers That Trigger the Tax

Federal law defines three transfer types, each with different mechanics and different parties on the hook.⁵

Direct Skips

A direct skip is a transfer straight from you to a skip person in a transaction already subject to gift or estate tax. A grandparent writing a $50,000 check to a grandchild is a direct skip. So is a bequest to a grandchild under a will. It can happen during life or at death. For direct skips made outside a trust, the transferor pays the tax; if the direct skip flows from a trust, the trustee pays.⁶ Direct skips are calculated on a tax-exclusive basis, which makes their effective burden lower than the other two categories.

Taxable Distributions

A taxable distribution happens when a trust pays a skip person and the payment isn’t a direct skip or a taxable termination. Say a trust benefits both a child and a grandchild, and the trustee writes a check to the grandchild from income or principal. That payment is a taxable distribution, and the recipient owes the tax.⁶ The calculation is tax-inclusive, so the full 40 percent rate applies to the whole distributed amount.

Taxable Terminations

A taxable termination occurs when an interest in a trust ends and only skip persons hold what’s left. The classic case: a child receives income from a trust for life, and when the child dies, the trust assets go to grandchildren. The child’s death ends their interest, only skip persons remain, and the tax fires. The trustee pays out of the trust’s assets, and the calculation is again tax-inclusive.⁶

How to Avoid or Reduce the Tax

Most transfers to younger generations never actually pay this tax, because the law provides several ways to keep them out of it.

The Lifetime Exemption

Every individual has a lifetime exemption that shields transfers to skip persons. The amount matches the basic exclusion under the estate and gift tax, which the One, Big, Beautiful Bill Act set at $15 million for 2026, with inflation adjustments in later years.¹⁷

The exemption isn’t automatic. You allocate it to specific transfers or trusts on your federal tax filings. Allocating it early to a trust means all later growth inside that trust can pass to younger generations free of the tax, because the allocation is measured against asset values at the time of allocation rather than distribution.⁸

Married couples each have their own $15 million exemption, for up to $30 million combined. Unlike the estate tax, though, the exemption isn’t portable between spouses. If one spouse dies without using it, it’s gone. Couples can elect to split gifts, treating each spouse as the maker of half of any gift to a third party, so both exemptions can offset a single large transfer.⁹

The Annual Gift Exclusion

The annual gift exclusion applies here too. For 2026, you can give up to $19,000 per recipient without touching your lifetime exemption or owing any gift tax.¹ A grandparent with five grandchildren could move $95,000 each year at that rate. Married couples splitting gifts can double it to $38,000 per grandchild.

Tuition and Medical Payments

Direct payments for tuition or medical expenses fall entirely outside the tax, with no dollar cap. The catch is in the word “direct”: you have to pay the school or the provider, not the grandchild. A check to your grandchild earmarked for tuition still counts as a gift. The same check written to the university drops out of the system altogether.¹⁰

How the 40 Percent Rate Actually Works

The statutory rate is a flat 40 percent, matching the top federal estate tax rate.¹¹ The effective rate on any given transfer, though, depends on how much exemption you’ve allocated to it. That’s the job of the inclusion ratio.

The math: the applicable fraction equals the exemption allocated to a trust divided by the value of the property transferred in. The inclusion ratio is one minus that fraction. Allocate $5 million of exemption to a $5 million trust and the ratio is zero, so the effective rate is zero. Allocate nothing and the ratio is one, so every future distribution takes the full 40 percent.¹²

Partial allocation matters. A $10 million trust with $5 million of exemption allocated to it has an inclusion ratio of 0.5, and the effective rate on every distribution is 20 percent. The ratio stays fixed for the life of the trust, so a trust funded when assets are cheap locks in a favorable number even as it grows.

Filing and Penalties

Generation-skipping transfers you make during life are reported on IRS Form 709, the same return used for gifts. It’s due April 15 of the year after the gift. An automatic six-month extension is available with Form 8892, and an extension of your income tax return automatically extends the gift tax filing deadline as well. Extensions push the filing date, not the payment date.¹³

Missing the deadline when tax is due sets off two penalties. Failure to file runs 5 percent of the unpaid tax per month, capped at 25 percent. Failure to pay adds 0.5 percent per month, also capped at 25 percent. Interest runs on top of both.¹⁴

Form 709 is also where you allocate your lifetime exemption to specific transfers and trusts. Even when no tax is owed because exemption remains, filing the return to document your allocation matters. Without a timely allocation on a filed return, default rules take over, and those defaults may not line up with what you want.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 U.S. Code 2651 – Generation Assignment
3
Office of the Law Revision Counsel. 26 USC 2613 – Skip Person and Non-Skip Person Defined
4
eCFR. 26 CFR 26.2651-1 – Generation Assignment
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Office of the Law Revision Counsel. 26 USC 2612 – Taxable Termination, Taxable Distribution, Direct Skip
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Office of the Law Revision Counsel. 26 U.S. Code 2603 – Liability for Tax
7
Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
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Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption
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Office of the Law Revision Counsel. 26 U.S. Code 2513 – Gift by Husband or Wife to Third Party
10
Office of the Law Revision Counsel. 26 U.S. Code 2611 – Generation-Skipping Transfer Defined
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Office of the Law Revision Counsel. 26 U.S. Code 2641 – Applicable Rate
12
eCFR. 26 CFR 26.2642-1 – Inclusion Ratio
13
Internal Revenue Service. Instructions for Form 709
14
Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax